Perianne is the CEO of Boring & Company, LLC, a financial services technology consulting firm. She served as an economic analyst in network broadcast news. Prior Perianne was a legislative analyst on Capitol Hill advising on economic, tax, and health care policy. She graduated with a degree in business and economics from the University of Florida. As a free market advocate, she also writes about macroeconomics and consumer finance.

Why Small Businesses - And President Obama - Would Be Wise To Jump On The Bitcoin Spaceship

Today we kick off National Small Business Week – the celebration of America’s job creators and those who represent 99.7% of all US businesses. The ingenuity, tenacity, and hard work they embody in growing their local communities often reflect the unsung heroes of our vibrant, entrepreneurial economy. President Obama champions small business and innovation in today’s economy. Now is the prime opportunity for the Administration, which is comprised of young, savvy innovators, to demonstrate support for innovation in financial services technology. Digital assets, including bitcoin, could save small businesses substantial transaction fees and provide an added layer of security to their payment processing.

National Small Business Week May 12 – 16, 2014

The Obama Administration presses the need to empower small businesses to succeed and the Small Business Administration focuses on initiatives toward this goal. Unleashing this financial services technology could enable small businesses to strengthen their cash flow by providing low-cost financial services. This will help American entrepreneurs, as well as billions of other people around the globe. According to the World Bank, 74% of the world’s populations do not have access to basic financial services. Bitcoin could be the fastest and simplest way to bring financial services to these populations.

Bitcoin and other similar technologies provide the next generation of financial services. As Trace Mayer, serial Bitcoin entrepreneur, recently said,

Companies need a Bitcoin strategy just as in the mid-1990s they needed an Internet strategy.”

Businesses which were slow to recognize the power of the Internet in the mid ‘90’s were quickly left behind. For example, Blockbuster failed to innovate with streaming technology and filed for Chapter 11 bankruptcy in 2010. We have also seen businesses fail to recognize the power of social media, mobile technology, and e-commerce and have watched businesses that failed to adapt to changing technology flounder, like Borders Books, who waited to get into e-books and filed for bankruptcy in 2011.

With these technology advances in finance, we’re in essence propelling ourselves from horse-and-buggies to spaceships. Major companies, including Overstock.comOverstock.com, Lord & Taylor, and Zynga, as well as billionaire entrepreneurs like Virgin’s Sir Richard Branson, appreciate the value that bitcoin can provide their businesses, including meeting consumer demand. For example, two-thirds of bitcoin customers on Overstock.com are new users, accounting for more than $2million in sales since January. Small businesses too, are finding bitcoin a valued added service.

The benefits that small businesses are realizing by utilizing bitcoin are lower fees, faster service and increased security for fraudulent transactions. The credit / debit card transaction system is antiquated, expensive, and inefficient. There are over nine steps to complete a transaction from the time a customer swipes their card, to payment processing, settlement, and when the merchant finally gets paid. Every step along the way costs both the consumer and the vendor in additional fees.

As Alexander Lawn of KnCMiner stated,

What makes this [bitcoin] different than traditional electronic payment processing is that there is no need for an issuing bank, an acquiring bank, merchant accounts, or mandatory centralized clearing house.”

The average credit card transaction processing fee is about 2.5% of the transaction amount. This process could take days or weeks. For small businesses using the Bitcoin payment protocol, the average transaction fee is 40 cents or, in many cases, free. CoinBase offers the first $1million processed free. The average Bitcoin transaction confirmation time is about 7 minutes.

In a small town in America an average retailer may gross between $250,000 and $500,000 a year. For the typical small business merchant in such a town to accept credit cards, the annual expense could range from $6,000 to 18,000. The breakdown of the expenses is as follows;

Point of Sale (POS) credit card hardware: about $250 start-up cost

Monthly merchant account fee: about $60 per month

Transaction fee: 2.5 to 4% per transaction

Dedicated phone line: $60+ per month

A small business merchant’s transactions might involve credit or debit cards about 80% of the time. If bitcoin were used in 25% of those transactions, the merchant could save about $4,000 a year. As small business owners know the value of a dollar, that is not an insignificant amount when operating on tight profit margins. These savings could be used to purchase more inventory, which could lead to higher sales. Or they could be put into a retirement account, making a lasting difference to someone who is self-employed.

Some have argued that bitcoin transactions are not as safe as using credit / debit cards and that with higher interchange fees comes more security measures. With Bitcoin every transaction is publicly verified, so many risks are eliminated, including chargeback fraud or “friendly fraud.” This is when a customer purchases something online with a credit card; waits to receive the goods or service, then requests a chargeback refund. The bank then forcibly takes the funds out of the merchant’s account.

Initially chargeback was introduced as a consumer protection against fraud from the merchant. It has been alleged that some credit card companies have turned this into an opportunity to collect additional fees. In 2003 MasterCard was sued for charging “arbitrary and onerous chargeback” fines. Paycom Billing Service, an Internet payment processor, asserted that MasterCardMasterCard’s chargeback policies made them a target to “friendly fraud” then stuck them with the bill. This case ended up being thrown out due to Paycom having lack of standing; however, MasterCard was still found in violation of Section 1 of the Sherman Antitrust Act. It’s also worth noting that MasterCard was the first company to hire lobbyists to focus on bitcoin issues.

Chargeback fraud often causes merchants harm. According to LexisNexis, merchants can pay up to $279 for every $100 lost to fraud,

Merchants not only incur the amount of chargebacks for which their company is held liable, but they also may pay fees and interest to financial institutions and pay to replace and redistribute lost or stolen merchandise.”

Recently digital currency has been a focus of federal regulators and Congress. While officials want to ensure that the services are used for legitimate purposes, they are also surveying the industry and assessing risk for investors and regulatory challenges. Chairman of the Senate Homeland Security Committee, Senator Tom Carper, applauded the Conference of State Bank Supervisors creation of a virtual currency task force to study such technologies:

As virtual currencies, like Bitcoin, and similar technologies continue to be increasingly utilized, we have to ensure that governments are adequately protecting consumers and addressing lawbreakers without hindering innovation.”

As bitcoin organically gains support from the business community and consumers, the Bitcoin Community must also be proactive to maintain grassroots support from these groups and sustain long-term viability in the marketplace. The reputational “hits” the industry has taken already have impacted its credibility. If the industry is serious, it should work with their allies to build the case for digital assets. The organizations that have seen success in integrating bitcoin and digital assets into their payment protocol should step forward and tell their story of jumping on the Bitcoin spaceship.

As the Obama Administration promotes the importance of small businesses across America this week, we should not overlook the advancements being made in financial services technology by small businesses. Bitcoin is a nascent technology with potential that has been compared to the Internet. This technology is being driven by small businesses that are fighting to revolutionize e-commerce. The Small Business Administration should also embrace the benefits this technology poses, of saving costs and reducing fraud, and encourage further innovation.

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